nep-ifn New Economics Papers
on International Finance
Issue of 2019‒05‒27
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The global capital flows cycle: structural drivers and transmission channels By Habib, Maurizio Michael; Venditti, Fabrizio
  2. EME financial conditions: which global shocks matter? By Lodge, David; Manu, Ana-Simona
  3. How does the interaction of macroprudential and monetary policies affect cross-border bank lending? By Előd Takáts; Judit Temesvary
  4. What are the consequences of global banking for the international transmission of shocks? A quantitative analysis∗ By Jose L. Fillat; Stefania Garetto; Arthur V. Smith

  1. By: Habib, Maurizio Michael; Venditti, Fabrizio
    Abstract: In this paper, we study the effects of structural shocks that influence global risk – the main factor behind a “global capital flows cycle” – and how risk, in turn, is transmitted to capital flows. Our results show that not all the risk shocks driving the global financial cycle have the same effects on capital flows. Changes in global risk caused by pure financial shocks have the largest impact on the global configuration of capital flows, followed by US monetary policy shocks. As regards the transmission of risk to capital flows, we uncover a traditional “trilemma”, as countries more financially open and adopting a strict peg are more sensitive to global risk. This “trilemma” is mainly driven by one category of cross-border flows, “other investment”, confirming the importance of cross-border banking loans in the narrative of the global financial cycle. JEL Classification: E42, E52, F31, F36, F41
    Keywords: capital flows, global financial cycle, global risk, international spillover, monetary policy
    Date: 2019–05
  2. By: Lodge, David; Manu, Ana-Simona
    Abstract: This paper provides a quantitative assessment of the relative importance of global structural shocks for changes in financial conditions across a sample of emerging market economies. We disentangle four key drivers of global financial markets (oil supply shocks, global economic news shocks, US-specific economic news shocks and US monetary shocks) and show that these global factors account for about half of the variation in risky asset prices across EMEs. The influence of global factors for EME interest rates and currencies is much smaller, suggesting that factors beyond the identified global shocks (e.g. domestic or regional shocks) might be more important. In contrast to the recent literature on the global financial cycle which has emphasised the prominent role of US monetary policy, we find that although US monetary shocks have some influence in shaping EME financial markets, the broader global environment plays a significantly stronger role. JEL Classification: E44, E52, G15
    Keywords: asset prices, emerging markets, financial conditions, global shocks, international financial markets, spillovers
    Date: 2019–05
  3. By: Előd Takáts; Judit Temesvary
    Abstract: We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.
    Keywords: monetary policy, macroprudential policy, cross-border claims, diff-in-diff analysis
    JEL: F34 F42 G21 G38
    Date: 2019–05
  4. By: Jose L. Fillat (Federal Reserve Bank of Boston); Stefania Garetto (Boston University, CEPR, and NBER); Arthur V. Smith (Boston University)
    Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis. In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
    Keywords: global banks, banking regulation, shock transmission.
    JEL: F12 F23 F36 G21
    Date: 2018–07

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